The big benefit of long-term investing is that years from now, you can potentially retire early. You may even be able to generate recurring income that you can live off of. Depending on where you live and the lifestyle you want to maintain, generating $50,000 in dividends every year could be enough for you to get by without having to rely on other sources of income.
But how do you set yourself up to accumulate that much in dividends? Below, I'll show you how you can grow your portfolio over the years to put yourself in a financially strong enough position where you can expect to generate $50,000 in dividends per year.
Start by investing in a growth-focused fund
When it comes to dividends, you need money to make money. There's no way around that. But if you have a lot of investing years left, you don't need hundreds of thousands of dollars today. You can invest in an exchange-traded fund (ETF) that is focused on growth stocks and can grow a five-figure investment at a high rate, to more than $1 million.
While investing in the S&P 500 can be a safe option, an ETF such as the Invesco QQQ Trust (QQQ -0.10%) can be a better choice for the long term. The fund gives you exposure to the top 100 nonfinancial stocks on the Nasdaq exchange. This means you're investing in some of the best growth stocks in the world. While you might experience periods of decline when their valuations are high, over the long term, this has been a great way to outperform the market.
Assuming you can collect a yield of around 4.5% in the future, that means you would need to aim for a portfolio balance of over $1.1 million. That high of a balance would be enough to convert a 4.5% yield into about $50,000 in annual dividends.
Let's also assume that the market won't grow at its historical rate of around 10% but instead average a lower return in the long run. However, if you're investing in the growth-focused Invesco fund, perhaps you may still be able to average an annual return of approximately 9%, which would factor in a slowdown in the future but potentially still outperform the S&P 500.
If you average a 9% return for 30 years, you need to invest around $83,000 today to get your portfolio to at least $1.1 million.
A dividend-focused ETF can generate recurring income and provide stability
When you get close to retirement is when you'll want to consider swapping out of a fund such as QQQ and into one that focuses on dividends. Investing in dividend stocks can lower your overall risk as these are businesses that are generally financially strong and posting regular profits. They are also often less volatile than growth stocks.
Decades from now, there may be far different options for high-yielding ETFs to choose from. But one example of a fund that would make for a good choice today is the Invesco High Yield Equity Dividend Achievers ETF (PEY 1.28%), which yields around 4.5%. As noted above, that would be a high enough yield to convert a $1.1 million investment into $50,000 in annual dividends.
You may, however, want to spread such a large investment over multiple ETFs to further minimize your risk. The hard part is building up that big of a portfolio balance to work with. But once you're at that stage, you'll have plenty of options and ETFs to consider.
Investing in the market can be a great idea, even if you don't have a big lump sum to invest
Many people won't have more than $80,000 to invest today in order to make this strategy work, but you can still periodically add to your portfolio over time. By making regular contributions every month and investing tax returns and other cash, you can afford to put into a fund such as the Invesco ETF , that can be a great way to steadily grow your portfolio over time.
Regardless of how much you can afford to invest, regularly setting aside money into a diverse growth fund can put you on track to a much stronger financial future.
